UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB/A
AMENDMENT NO. 3
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended May 31, 2002
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from _______ to ___________
Commission file number 0-14401
SANDATA TECHNOLOGIES, INC.
(Exact name of small business issuer in its charter)
DELAWARE 11-2841799
(State or other jurisdiction of (I.R.S. Employee Identification No.)
incorporation or organization)
26 Harbor Park Drive
Port Washington, NY
(Address of principal executive offices)
11050
(Zip Code)
Issuer's telephone number, including area code: (516) 484-4400
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- ------
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for year ended May 31, 2002 were $17,852,710.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of August
16, 2002 was $1,536,918.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No
---------------- -------------
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of each of the issuer's classes of common
equity, as of March 20, 2003 was 2,481,806.
Transitional Small Business Disclosure Format (check one):
Yes No X
------------ ------------
DOCUMENTS INCORPORATED BY REFERENCE
None.
AMENDMENT TO ANNUAL REPORT
ON FORM 10-KSB
FOR THE YEAR ENDED MAY 31, 2002
The Annual Report on Form 10-KSB for Sandata Technologies, Inc. (the
"Company") for the year ended May 31, 2002 is hereby amended and restated to the
extent, and only to the extent, of the following amendments:
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company provides its computerized information processing services to a
variety of users, although principally to the health care industry. Many of the
Company's software programs are adaptable to customers in related fields of
enterprise. Thus, the components of the SHARP system for the Home Attendant
Program - Medicaid reimbursable billing, management reports, payroll processing,
tax reports - are being developed for utilization in other settings, such as
nursing homes, skilled nursing facilities, and rehabilitation facilities.
The Company's telephone-based data collection services are currently
principally used to monitor off-site workers in the home healthcare industry.
The SANTRAX proprietary software could be used to monitor off-site workers in
other industries, and the Company is currently exploring opportunities in the
temporary staffing, security guard and building maintenance industries.
Technology infrastructure and outsourcing services are currently utilized
in-house and within affiliate companies. The Company intends to take the core
competencies that it has developed in supporting its service offerings and
resell them into the business community in the New York metropolitan area. The
Company cannot assure its ability to resell such services.
The Company believes it can leverage its in-house capabilities to develop a
new IT services business, and intends that such IT services will be marketed
primarily to businesses in the New York metropolitan area, where it believes it
can support professional services with on-site technical help. In the future,
the Company believes it will have the capability of rolling out such IT services
to a wider geographical audience. The Company cannot assure its ability to
develop a new IT service business and cannot predict that such services will be
successful.
Analysis of Operations
Fiscal Years ended May 31, 2002 compared with May 31, 2001
Service fee revenues for fiscal 2002 were $17,173,922 as compared to
$17,769,069 for the previous fiscal year, a decrease of $595,147 or 3%. The
decrease is primarily attributable to a decrease in service fee revenues from
Health Card of approximately $1,300,000 due to a reduction of programming and
technical services provided by the company. Previously, Health Card did not have
its own programming and technical services and therefore outsourced these
services to the company. However, as Health Card has grown, it has developed its
own programming and technical services and therefore the demand for the
Company's outsourcing services has decreased. In addition, the decrease is
partially attributable to the sale of a customer list to a third party, as a
result of which the Company is no longer able to recognize the revenues from
such customers. The decrease in revenues is partially offset by increases in
revenue from SandataNet Consulting of approximately $1,266,000 due to several
consulting contracts with customers.
Other income for the year ended May 31, 2002 was $514,999 as compared to
$368,502 for the year ended May 31, 2001, an increase of $146,497 or 40%. The
increase is attributable to $115,000 in payments received in connection with a
litigation settlement and the sale of a customer list for $79,000 to a third
party. This increase is partially offset by a decrease in revenue recognition on
sales/leasebacks transactions as some of the leases have expired and no new
sales/leasebacks were entered into during fiscal 2002.
Expenses Related to Services
Operating expenses were $9,877,651 for the year ended May 31, 2002, as
compared to $10,372,524 for the year ended May 31, 2001, a decrease of $494,873
or 5%. Decreased payroll expenses (approximately $875,000) due to a reduction in
workforce, and decreased equipment rental expenses (approximately $373,000),
partially offset by increases in purchases for resale (approximately $945,000)
were the primary factors for the decrease in operating expenses.
Selling, general and administrative expenses for the year ended May 31,
2002 were $5,502,264 compared to $5,004,255 for the year ended May 31, 2001, an
increase of $498,099 or 9%. The increases were primarily due to increases in
consulting and legal expenses, and additional insurance premiums.
Depreciation and amortization expenses were $1,839,959 for the year ended
May 31, 2002, as compared to $2,748,411 for the year ended May 31, 2001, a
decrease of $908,452 or 33%. The decrease was primarily attributable to the
write off of impaired software in 2001, as described below under the heading
"Impairment of Developed Software."
Interest expense for the year ended May 31, 2002 was $241,729 as compared
to $189,240 for the year ended May 31, 2001, an increase of $52,489 or 28%. The
increase was a result of higher overall average daily balances under the
Company's revolving credit agreement. The higher overall daily balances were
primarily due to increased borrowings to fund working capital requirements,
specifically to fund the Company's increased accounts payable and accrued
expenses.
Impairment of Developed Software
During the fourth quarter of the year ended May 31, 2001, the Company shut
down certain operating systems and hardware configurations, which had been
capitalized in previous years. The Company had determined that the older
system's architecture had become obsolete and too costly to maintain, so the
Company coordinated placing several new systems in production after running
parallel with pre-existing systems resulting in the retirement of the older
systems during the fourth quarter. The Company further determined that there is
no net realizable value remaining since no future revenue would be recognized in
the retired systems because the architecture was completely replaced by the new
systems. As such the Company recognized an impairment loss of approximately
$3,300,000 for the year ended May 31, 2001.
Impairment of Goodwill
On April 27, 2001, the Company acquired certain assets of North American
Internet Services, Inc. ("NAIS"), a provider of broadband services, Internet
access, and co-location services for approximately $201,000. NAIS had entered
bankruptcy proceedings and, under the auspices of the Bankruptcy Court, the
Company was permitted to "credit bid" approximately $124,000 of expenses
(including salaries) it had incurred on behalf of NAIS as the purchase price for
the assets, and was given 180 days to exploit the assets it had acquired. The
Company incurred approximately $77,000 in additional costs related to the
acquisition of these assets. The tangible assets were determined to have no
significant fair value. Therefore, all the expenditures related to the
acquisition were allocated to goodwill. The Company has the option to abandon
the exploitation of these assets within the 180 day period. If the Company
continues to use the NAIS assets, 10% of the profits (defined as earnings before
interest expense and taxes) generated by such use must be paid to the bankruptcy
estate for the first three years.
At May 31, 2001, the Company performed an evaluation of the recoverability
of the assets acquired from NAIS and concluded that a significant impairment of
these assets had occurred based on actual results during the year ended May 31,
2001 and on estimated future cash flows not being sufficient to recover the
carrying value of the goodwill. As such, the carrying value of goodwill was
written down to its estimated fair value, which was determined based on
discounted estimated cash flows. The Company recognized an impairment loss and
write down of the goodwill of approximately $201,000. Considerable management
judgment is necessary to estimate fair value; accordingly, actual results could
vary significantly from such estimates.
Income Tax Expenses
Income tax expense (benefit) was $249,067 and $(1,293,401) for fiscal 2002
and 2001, respectively. The increase in income tax expense is due to higher
pretax income. The effective tax rates for fiscal 2002 and 2001 were 63.7% and
(37.0%), respectively.
IDA/SBA Financing
In November, 1996 the Company entered into an agreement with the Affiliate,
the Nassau County Industrial Development Agency ("NCIDA"), and Marine Midland
Bank (the "Bondholder") (the "Agreement"). Pursuant to the Agreement, the
Affiliate (i) assumed all of the Company's rights and obligations under a Lease
Agreement that was previously between the Company and the NCIDA (the "Lease"),
and (ii) entered into a Sublease Agreement with the Company for the premises the
Company occupies. Pursuant to the Agreement, the Affiliate also obtained the
right to become the owner of the premises upon expiration of the Lease. Under
the terms of the Agreement, the Company is jointly and separately liable to the
NCIDA for all obligations owed by the Affiliate to the NCIDA under the Lease;
however, the Affiliate has indemnified the Company with respect to certain
obligations relative to the Lease and the Agreement. In addition, the Agreement
provides that the Company is bound by all the terms and conditions of the Lease,
and that a security interest is granted to the Affiliate in all of the Company's
fixtures constituting part of the premises.
The foregoing transactions and agreements were the last in a series of
transactions involving the Company, the Affiliate, NCIDA, the Bondholder and the
U.S. Small Business Administration. Chief among these was the borrowing by the
Affiliate in June of 1994 of $3,350,000 in the form of Industrial Development
Revenue Bonds (the "Bonds") to finance the acquisition of the Facility.
Simultaneously with the issuance of the Bonds: (1) NCIDA obtained title to the
Facility and leased it to the Affiliate, (2) the Affiliate subleased the
Facility to the Company, (3) the Bondholder bought the Bonds, (4) the Bondholder
received a mortgage and security interest in the Facility to secure the payment
of the Bonds. The Affiliate's obligations under the Lease were guaranteed by Mr.
Brodsky, the Company, Sandsport and others. The Affiliate's obligations
respecting repayment of the Bonds were also guaranteed by Mr. Brodsky, the
Company, Sandsport and others.
The Bonds currently bear interest at the rate of 9%, and the outstanding
balance due on the Bonds as of May 31, 2002 was $1,444,445. During the years
ended May 31, 2002 and 2001, the Company paid rent to the Affiliate of
approximately $408,000 and $615,000, respectively.
On August 11, 1995, the Company entered into a $750,000 loan agreement with
the Long Island Development Corporation ("LIDC"), under a guarantee by the U.S.
Small Business Administration ("SBA") (the "SBA Loan"). The SBA Loan was
assigned to the Affiliate in November 1996; however, repayment of the SBA Loan
is guaranteed by the Company and various subsidiaries of the Company. The entire
proceeds were used to repay a portion of the Bonds. The SBA Loan is payable in
240 monthly installments of $6,255, which includes principal and interest at a
rate of 7.015%. The balance of the SBA Loan as of May 31, 2002 was $599,024.
Liquidity and Capital Resources
The Company's working capital decreased as of May 31, 2002 to $1,890,988
from $1,956,661 as of May 31, 2001. The primary factors that contributed to the
decrease were increases in accounts payable, accrued expenses and notes
receivable-officer, and decreases in receivables from affiliates and deferred
income, offset by an increase in cash and cash equivalents.
The Company has spent approximately $2,620,049 for fixed asset additions,
including software capitalization costs in connection with revenue growth and
new product development. The Company expects a reduction in the levels of
capital expenditures in the future.
On July 14, 1998 the Chairman, certain officers and directors (Bert E.
Brodsky, Hugh Freund and Gary Stoller), and a former director, Carol Freund (who
is also the spouse of an officer and an employee of Sandsport Data Services,
Inc. ("Sandsport"), the Company's wholly owned subsidiary), exercised their
respective options and warrants to purchase an aggregate of 921,334 shares of
Common Stock. The exercise prices ranged from $1.38 to $2.61 per share for an
aggregate cost of $1,608,861. Payment for such shares was made to the Company in
the amount of $921 representing the par value of the shares, and a portion in
the form of non-recourse promissory notes due in July 2001, with interest at
eight and one-half percent (8-1/2%) per annum, payable annually, and secured by
the number of shares exercised. The Company has received interest payments on
such notes in the amount of $131,994 and $162,110 during the fiscal years ended
May 31, 2002 and 2001. As of May 31, 2002 and 2001, the outstanding balance on
such notes, including principal and accrued but unpaid interest, was $1,669,640
and $1,722,547, respectively (see item 7 "Financial Statements" note 12d). On
July 14, 2001, the Company agreed to extend the due dates of the Promissory
Notes for one hundred twenty days. On November 9, 2001, the due date of the
Notes was extended to November 9, 2004, and the Company agreed to substitute
full recourse unsecured Notes for the Notes it had previously accepted.
Effective December 1, 2001, the interest rate was changed from 8-1/2% to 6% to
reflect fair market value, and the shares and note of the spouse of the officer,
Carol Freund, were both transferred to the officer. Had the Company not extended
the due dates of the Promissory Notes, working capital would have been augmented
by $1.6 million in July 2001. Also the interest rate reduction in the notes will
decrease accrued interest by approximately $30,000 per annum based on the
current balance of such notes at May 31, 2001.
On April 18, 1997 Sandsport, entered into a revolving credit agreement (the
"Credit Agreement") with the Bank which allowed Sandsport to borrow amounts up
to $3,000,000. Interest accrues on amounts outstanding under the Credit
Agreement at a rate equal to the London Interbank Offered Rate plus 2% and will
be paid quarterly in arrears or, at Sandsport's option, interest may accrue at
the Bank's prime rate. The Credit Agreement requires Sandsport to pay a fee
equal to 1/4% per annum on the unused average daily balance of amounts under the
Credit Agreement. In addition, there are other fees and charges imposed based
upon Sandsport's failure to maintain certain minimum balances. The Credit
Agreement has been amended by the Bank to permit Sandsport to borrow amounts up
to $4,500,000 until June 14, 2003. Interest accrues at the same rate as the
original Credit Agreement. The indebtedness under the Credit Agreement is
guaranteed by the Company and Sandsport's sister subsidiaries (the "Group"). All
of the Group's assets are pledged to the Bank as collateral for amounts due
under the Credit Agreement, which pledge is secured by a first lien on all
equipment owned by members of the Group, as well as a collateral assignment of
$2,000,000 of life insurance payable on the life of the Company's Chairman. The
Group's guaranty to the Bank was subsequently modified to include all
indebtedness incurred by the Company under the amended Credit Agreement dated
August 24, 2001 (see below).
In addition, pursuant to the Credit Agreement, the Group is required to
maintain certain levels of net worth and meet certain financial ratios in
addition to various other affirmative and negative covenants. At May 31, 2001
the Group failed to meet these net worth and financial ratios, and the Bank
granted the Group a waiver. As of August 24, 2001, Sandsport, the Company and
the other members of the Group, and the Bank, entered into the Third Amendment
and Waiver (the "Third Amendment") to the Credit Agreement. Pursuant to the
Third Amendment, Sandsport's covenants to the Bank to maintain a certain net
worth and to maintain certain financial ratios were revised, on a going-forward
basis, and the noncompliance with the existing covenants was waived by the Bank.
In addition, in connection with the Third Amendment, Sandsport and each member
of the Group executed and delivered to the Bank a Collective Amended and
Restated Security Agreement, pursuant to which the Bank's security interest was
extended to include a security interest in all of the personal and fixture
property of Sandsport, the Company and the members of the Group. On April 11,
2002 the Bank approved the extension of the termination date of the Credit
Agreement to June 14, 2003. There can be no assurance that the Bank will
continue to grant waivers if the Group fails to meet the net worth and financial
ratios in the future. If such waivers are not granted, any loans outstanding
under the Credit Agreement become immediately due and payable, which may have an
adverse effect on the Company's business, operations or financial condition. As
of May 31, 2002, the outstanding balance on the Credit Agreement with the Bank
was $4,500,000 and the Company was in compliance with the covenants.
The Company is a party to various sale/leaseback transactions involving
certain fixed assets, principally computer hardware, software and equipment.
Gains on these transactions have been deferred and are being recognized over the
lives of the related leases, each of which is 36 months. Approximately $297,000
and $344,000 of the deferred gains were recognized in other income for the years
ended May 31, 2002 and 2001, respectively. Included in these amounts are the
effects of the following sale/leaseback transactions:
(a) In January 1998, the Company consummated a sale/leaseback of certain
fixed assets which had a net book value of approximately $515,000, were sold for
$700,000. The resulting gain of approximately $185,000 was recorded as deferred
income and is being recognized over the life of the lease. Approximately $36,000
of the deferred gain was recognized for the year ended May 31, 2001, which was
the last year of the lease. An unaffiliated third party purchased the residual
rights in such lease.
(b) In January 1999, the Company consummated a sale/leaseback of certain
fixed assets which had a net book value of approximately $830,000, were sold for
$1,100,000. The resulting gain of approximately $270,000 was recorded as
deferred income and is being recognized over the life of the lease.
Approximately $60,000 and $90,000 of deferred gain was recognized for the years
ended May 31, 2002 and 2001, respectively. An unaffiliated third party purchased
the residual rights in such lease.
(c) In May 1999, the Company entered into a sale/leaseback of certain fixed
assets which had a net book value of approximately $896,000 were sold for
$1,100,000. The resulting gain of approximately $204,000 was recorded as
deferred income and is being recognized over the life of the lease.
Approximately $68,000 of deferred gain was recognized for each of the years
ended May 31, 2002 and 2001. An unaffiliated third party purchased the residual
rights in such lease.
(d) In October 1999, the Company consummated a sale/leaseback of certain
fixed assets which had a net book value of approximately $895,000, were sold for
$1,115,000. The resulting gain of approximately $220,000 was recorded as
deferred income and is being recognized over the life of the lease.
Approximately $73,000 of the deferred gain was recognized for each of the years
ended May 31, 2002 and 2001. An unaffiliated third party purchased the residual
rights in such lease.
(e) In January 2000, the Company consummated a sale/leaseback of certain
fixed assets which had a net book value of approximately $442,000, were sold for
$561,000. The resulting gain of approximately $119,000 was recorded as deferred
income and is being recognized over the life of the lease. Approximately $40,000
of deferred gain was recognized for each of the years ended May 31, 2002 and
2001. An unaffiliated third party purchased the residual rights in such lease.
(f) In February 2000, the Company entered into a sale/leaseback of certain
fixed assets which had a net book value of approximately $237,000, were sold for
$277,000. The resulting gain of approximately $40,000 was recorded as deferred
income and is being recognized over the life of the lease. Approximately $14,000
of deferred gain was recognized for each of the years ended May 31, 2002 and
2001. An unaffiliated third party purchased the residual rights in such lease.
(g) In November 2000, the Company entered into a sale/leaseback of certain
fixed assets which had a net book value of approximately $421,500, were sold for
$548,300. The resulting gain of approximately $126,800 was recorded as deferred
income and is being recognized over the life of the lease. Approximately $42,000
and $21,000 of the deferred gain was recognized for the years ended May 31, 2002
and 2001, respectively. An unaffiliated third party purchased the residual
rights in such lease.
Until January of 2002, the Company was leasing equipment and providing
services to Health Card pursuant to a verbal agreement, and was receiving its
allocable share of administrative and support services that were shared by
Health Card and the Company at a cost to Health Card of approximately
$81,000/month. As of January, 2002, the Company ceased rendering services to
Health Card. Health Card continues to pay its allocable share of expenses for
shared services, which amounts to approximately $45,000 per month.
The Company believes the results of its present operations, together with
the available Credit Line, should be adequate to fund present and foreseeable
working capital requirements.
The allowance for doubtful accounts for the year ended May 31, 2002 was
$203,000, as compared to $347,000 for the year ended May 31, 2001, a decrease of
$144,000 or 70%. During fiscal year 2002 the Company's aging of accounts
receivable improved significantly. As a result, the allowance for doubtful
accounts was decreased to reflect the improvement of the aged outstanding
receivables.
Prospects for the Future, Trends and Other Events
There is added competitive pressure and uncertainty in the Company's SHARP
business because the City of New York requires all contracts with City agencies
to undergo competitive bidding. Furthermore, the success of its SHARP business
rests with a key officer of the Company, who has established strong
relationships with the Company's SHARP customers over the years. Although the
Company has been awarded contracts based on its bids, there can be no assurance
that its bids will be accepted in the future.
Going Private Transaction
The Company has received a proposal to engage in a going private
transaction. The proposed transaction is anticipated to be in the form of a
merger with an entity owned by an investor group to be led by Bert E. Brodsky,
the Company's Chief Executive Officer, and to include Hugh Freund and Gary
Stoller, as well as other investors (the "Acquiring Group"). Pursuant to the
proposal, the Company's shareholders (other than Mr. Brodsky and the other
shareholders that shall comprise part of the Acquiring Group) would receive
$1.50 per share of Common Stock of the Company (the "Shares"), in cash. The
proposal may be amended, modified or supplemented at any time.
The Board of Directors has appointed a Special Committee (the "Committee"),
comprised of Ronald Fish and Martin Bernard, to review the proposed transaction.
The Committee has retained Brean Murray & Co., Inc. as its financial advisor,
and has retained its own legal counsel.
The proposed transaction would result in the acquisition of all of the
outstanding Shares of the Company other than the shares owned by Mr. Brodsky and
the other shareholders that shall comprise part of the Acquiring Group. The
final terms of any acquisition will be based on negotiations between the
Acquiring Group and the Committee. The proposed acquisition will be subject to,
among other things, (1) the negotiation, execution, and delivery of a definitive
agreement, (2) approval of the proposed transaction by the Committee, the full
Board of Directors and the Company's shareholders, (3) receipt of a fairness
opinion by the Committee, (4) applicable regulatory approval, and (5) obtaining
any necessary third-party consents or waivers. There can be no assurance that a
definitive merger agreement will be executed and delivered, or that the proposed
transaction will be consummated.
Except as discussed above, the Company has no knowledge of any specific
prospects, industry or other trends, events or uncertainties that might have a
material impact on the Company's net sales or revenues or income from continuing
operations, or that would increase the value of the shares in the long-term or
the short-term.
ITEM 7 FINANCIAL STATEMENTS
(BEGINS ON PAGE F-1 BELOW)
SANDATA TECHNOLOGIES, INC.
FINANCIAL STATEMENTS COMPRISING ITEM 7
OF REPORT ON FORM 10-KSB
TO SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED MAY 31, 2002
SANDATA TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
Financial Statements
Consolidated Balance Sheets as of May 31, 2002 and 2001 F-3
Consolidated Statements of Operations for the years ended
May 31, 2002 and 2001 F-4
Consolidated Statement of Shareholders' Equity for the years
ended May 31, 2002 and 2001 F-5
Consolidated Statements of Cash Flows for the years ended
May 31, 2002 and 2001 F-6
Notes to Consolidated Financial Statements F-7 - F-29
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
of Sandata Technologies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Sandata
Technologies, Inc. and Subsidiaries (formerly Sandata, Inc.) as of May 31, 2002
and 2001, and the related consolidated statements of operations, shareholders'
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sandata Technologies, Inc. and Subsidiaries as of May 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
As more fully described in the Notes to the consolidated financial
statements, the Company had certain transactions with companies affiliated with
the Company's Officers and Chairman.
/s/ Marcum & Kliegman LLP
Woodbury, New York
July 26, 2002, except for Notes 12c and 12d, which are dated August 21, 2002 and
August 22, 2002, respectively
SANDATA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
May 31,
2002 2001
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 1,630,617 $ 475,578
Accounts receivable, net of allowance for doubtful accounts
of $202,746 and $346,903 at 2002 and 2001, respectively 2,182,963 2,160,675
Receivables from affiliates 280,297 802,787
Notes receivable - officer 100,000 --
Inventories 45,342 35,993
Prepaid expenses and other current assets 345,349 416,056
Deferred income taxes 207,595 274,470
------------ ------------
Total Current Assets 4,792,163 4,165,559
FIXED ASSETS, NET 6,820,596 6,036,203
-----------------
DEFERRED INCOME TAXES 171,579 335,773
---------------------
OTHER ASSETS
Notes receivable 25,190 29,669
Cash surrender value of officer's life insurance, security
deposits and other assets 1,105,502 866,774
------------- -------------
Total Assets $12,915,030 $11,433,978
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,781,550 $ 1,881,269
Deferred/unearned revenue - maintenance contracts 16,367 31,069
Deferred income - sale/leasebacks 103,258 296,560
------------- -------------
Total Current Liabilities 2,901,175 2,208,898
LONG-TERM DEBT 4,500,000 3,850,000
--------------
DEFERRED INCOME 21,142 124,401
--------------- -------------- -------------
Total Liabilities 7,422,317 6,183,299
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.001 par value, 6,000,000 shares
authorized; 2,481,808 and 2,506,475 shares issued and
outstanding in 2002 and 2001, respectively 2,482 2,506
Additional paid in capital 5,765,766 5,803,704
Retained earnings 1,193,755 1,051,721
Notes receivable - officers (1,469,290) (1,607,252)
----------- -----------
Total Shareholders' Equity 5,492,713 5,250,679
------------ ------------
Total Liabilities and Shareholders'
Equity $12,915,030 $11,433,978
=========== ===========
SANDATA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended May 31,
2002 2001
---- ----
REVENUES
Service fees $17,173,922 $17,769,069
Other income 514,999 368,502
Interest income 163,789 185,311
------------- -------------
TOTAL REVENUES 17,852,710 18,322,882
----------- -----------
COSTS AND EXPENSES
Operating 9,877,651 10,372,524
Selling, general and administrative 5,502,264 5,004,255
Depreciation and amortization 1,839,965 2,748,411
Interest expense 241,729 189,240
Impairment of developed software -- 3,298,872
Impairment of goodwill 201,128
------------ ------------
--
TOTAL COSTS AND EXPENSES 17,461,609 21,814,430
----------- -----------
Earnings (loss) before income taxes 391,101 (3,491,548)
Income tax expense (benefit) 249,067 (1,293,401)
---------------------------- ------------ -----------
NET EARNINGS (LOSS) $ 142,034 $ (2,198,147)
============ ============
PER SHARE INFORMATION
BASIC AND DILUTED EARNINGS (LOSS) PER
SHARE $ .06 $ (.88)
============= ===============
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING 2,494,175 2,506,475
========= =========
SANDATA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended May 31, 2002 and 2001
Additional Notes Total
Paid-In Retained Receivable Shareholders'
Common Stock Capital Earnings Officers Equity
------------ ------- -------- -------- ------
Shares Amount
------ ------
Balance at
June 1, 2000 2,506,475 $2,506 $5,803,704 $ 3,249,868 $(1,607,252) $ 7,448,826
Net Loss -- -- -- (2,198,147) -- (2,198,147)
----------- ----------- ---------- ----------- ------------- -------------
Balance at
May 31, 2001 2,506,475 2,506 5,803,704 1,051,721 (1,607,252) 5,250,679
Reclassification of notes
receivable officer (re-paid
subsequent to year-end-Note 12d)
-- -- -- -- 100,000 100,000
Effect of Stock
Surrender (24,667) (24) (37,938) -- 37,962 --
Net Earnings -- -- -- 142,034 -- 142,034
--------- ------- -------- ----------- ---------- -----------
Balance at
May 31, 2002 2,481,808 $2,482 $5,765,766 $ 1,193,755 $(1,469,290) $ 5,492,713
========= ====== ========== =========== =========== ===========
SANDATA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended May 31,
2002 2001
---- ----
Cash flows from operating activities
Net earnings (loss) $ 142,034 $(2,198,147)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,839,965 2,748,411
(Gain) loss on disposal of fixed assets (4,309) 75,111
Change in allowance for doubtful accounts (144,157) (100,879)
Recognition of deferred income (296,561) (343,820)
Recognition of deferred revenue (36,121) (116,702)
Impairment of developed software -- 3,298,872
Impairment of goodwill -- 201,128
Deferred tax provision 231,069 (1,312,401)
(Increase) decrease in operating assets
Accounts receivable 121,869 249,105
Receivables from affiliates 522,490 (397,055)
Inventories (9,352) (18,828)
Prepaid expenses and other current assets 70,708 (2,937)
Other assets (234,247) (24,827)
(Decrease) Increase in operating liabilities
Accounts payable and accrued expenses 900,282 (698,874)
Deferred/unearned revenue - maintenance contracts 21,418 108,923
Deferred income - sales/leasbacks -- 126,850
----------- -------------
Net cash provided by operating activities 3,125,088 1,593,930
----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (2,620,049) (3,795,285)
Proceeds from sale/leaseback transactions -- 548,343
Acquisition of intangible asset -- (201,128)
----------- ------------
Net cash used in investing activities (2,620,049) (3,448,070)
----------- -----------
Cash flows from financing activities
Principal payments on note payable (500,000) (500,000)
Proceeds from note payable 500,000 --
Proceeds from line of credit 3,800,000 2,200,000
Principal payments on line of credit (3,150,000) (600,000)
----------- -----------
Net cash provided by financing
activities 650,000 1,100,000
------------ -----------
INCREASE (Decrease) in cash and cash 1,155,039 (754,140)
equivalents
Cash and cash equivalents - beginning 475,578 1,229,718
------------------------- ------------ ----------
Cash and cash equivalents - ending $ 1,630,617 $ 475,578
------------------------- =========== ==========
NOTE 1 - Summary of Significant Accounting Policies
Nature of Business and Economic Dependency
Sandata Technologies, Inc. and Subsidiaries (the "Company", formerly known
as Sandata, Inc. ) are primarily engaged in the business of providing
computerized data processing services and custom software and programming
services using Company-developed and licensed software principally to the
healthcare industry. The Company primarily operates in the New York metropolitan
area. During fiscal years ended May 31, 2002 and 2001, the Company received
revenues from a group of customers who are all funded by the Human Resources
Administration of the City of New York ("HRA"), amounting to approximately
$10,549,000 and $10,608,000, respectively. The Company was owed approximately
$1,259,000 and $1,160,000 from these customers at May 31, 2002 and 2001,
respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of Sandata
Technologies, Inc. and its wholly owned subsidiaries: Sandsport Data Services,
Inc., Sandata Home Health Systems, Inc., Sandata Spectrum, Inc., SANTRAX
Systems, Inc., SANTRAX Productivity, Inc. and Pro-Health Systems, Inc.
("Pro-Health", formerly known as Sandata Inteck, Inc.). SANTRAX Productivity,
Inc. and Sandata Spectrum, Inc. are inactive subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain accounts in the prior year financial statements have been
reclassified for comparative purposes to conform with the presentation in the
current year financial statements. These reclassifications have no effect on
previously reported earnings/loss.
Fixed Assets
Fixed assets are recorded at cost. Depreciation and amortization are
computed principally by the straight-line method over the lesser of the
estimated useful lives or lease terms of the related assets.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets, including goodwill, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the asset to future net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets as determined by estimated discounted cash
flows. Assets to be disposed of are reported at the lower of the carrying amount
or fair value less costs to sell.
Income Taxes
The Company uses the liability method to account for income taxes. The
primary objectives of accounting for income taxes are to (a) recognize the
amount of income tax payable for the current year and (b) recognize the amount
of deferred tax liability or asset based on management's assessment of the tax
consequences of events that have been reflected in the Company's financial
statements or tax returns. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
Software Costs
The Company capitalizes software development costs from the point in time
where technological feasibility has been established until the computer software
product is available to be sold. The annual amortization of the capitalized
amounts is the greater of the ratio of current revenue to total projected
revenue for a product, or the straight-line method, and is applied over periods
ranging up to five years. The Company performs periodic reviews to ensure that
unamortized program costs remain recoverable from future revenue.
Research and Development
Research and development costs are charged to expense as incurred. Research
and development expenses amounted to approximately $62,000 and $10,000 in 2002
and 2001, respectively.
Inventories
Inventories, consisting of computer hardware and peripherals held for
resale, are stated at the lower of cost or market; cost is determined using the
specific identification method.
Net Earnings Per Common Share
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share". Basic
earnings per share has been computed using the weighted average number of shares
of common stock outstanding. Diluted earnings per share has been computed using
the basic weighted average shares of common stock issued adjusted for the
dilutive effect of outstanding stock options.
For the year ended May 31, 2002 options and warrants to purchase 1,374,419
shares of common stock were outstanding and were not included in the computation
of diluted earnings per share because the exercise price of the options and
warrants were greater than the average market price of the common stock. For the
year ended May 31, 2001, outstanding stock options, warrants and other potential
stock issuances were not been considered in the computation of diluted earnings
per share amounts since the effect of their inclusion would have been
antidilutive. The Company uses the treasury stock method to calculate the effect
that the conversion of the stock options would have on earnings per share and
the weighted average number of shares of common stock.
Revenue Recognition
Computerized Information Processing Services
The Company generates revenues for its computerized information processing
services from its Sandsport Home Attendant Reporting Program ("SHARP") and
Pro-Health software applications. The SHARP application provides weekly time
sheets, billing, payroll processing and management reports for not-for-profit
agencies that provide home attendant services to those in need. Revenues are
recognized for these services in the period they are provided. The Pro-Health
application is an application service provider solution that provides home
health care customers access to the Company's software over the Internet without
needing sophisticated hardware at its site to house the software or store the
data. Customers using this application are charged a monthly fee and revenue is
recognized on a monthly basis as the service is provided.
Telephone-Based Data Collection Services
The Company generates revenues for its telephone-based data collection
services from its automated electronic system knows as Sandata(R) SANTRAX(R)
("SANTRAX") software application. The SANTRAX application is an automated
electronic system that incorporates telephone technologies into the data
reporting process to monitor the arrival and departure times of off-site
workers. Revenues from this application are recognized based on a per call or
visit basis in the period in which the services are provided.
Technology Infrastructure and Outsourcing Services
Revenues from technology infrastructure and outsourcing services such as
data processing, technology infrastructure consulting, web site development,
running e-commerce applications and reselling telephone services are recognized
based on per hour or call rates in the period the service is provided.
Information Technology Services
The Company generates revenues from information technology services under
the name of SandataNet and includes services such as software support, hardware
support/break-fix, Local Area Network ("LAN") administration and configuration
services and the reselling of computer hardware and third-party software
systems; some of the services are pursuant to long-term contracts. Support
revenue is recognized based on per hour rates in the period the service is
provided. For maintenance contracts greater than one month, revenue is
recognized over the term of the contract on a straight-line basis. Computer
hardware and software resale revenues are recognized when the units are shipped
and accepted by the customer. The Company does not bundle maintenance with any
software sold.
Long-Term Contracting
As discussed above, the Company utilizes long-term contracts and recognizes
revenue for financial statement purposes under the percentage of completion
method and, therefore, takes into account the costs, estimated earnings and
revenue-to-date on contracts not yet completed.
The amount of revenue recognized at the financial statement date is the
portion of the total contract price that the direct labor costs expended to date
bears to the anticipated total direct labor costs, based on current estimates of
costs to complete. Direct labor costs include all direct labor, related
benefits, and subcontract costs. This method is used because management
considers direct labor costs to be the best available measure of progress on
these contracts.
Revisions in estimates of costs and earnings during the life of the
contracts are reflected in the accounting period in which such revisions become
known. At the time a loss on a contract becomes known, the entire amount of the
estimated loss is recognized in the financial statements. Billings in excess of
estimated costs and earnings on uncompleted contracts are included in
deferred/unearned revenue.
Sale/Leaseback
The Company recognizes gains from sale/leaseback transactions ratably over
the term of the underlying lease. All such leases are operating leases. Any
losses from these transactions are recognized in the period incurred.
Deferred income - sale/leasebacks
The Company recognizes the unrealized gain from sale/leaseback transactions
over the term of the underlying lease. The long-term portion represents
sale/leaseback gain that will not be recognized within one year of the balance
sheet date.
Deferred/unearned revenue - maintenance contracts
The Company collects maintenance fees for various internally developed
software applications which have not been earned as of the balance sheet date.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents.
Due to the nature of its operations, the Company deposits, on a monthly
basis, amounts in financial institutions for the payment of payroll liabilities
for certain customers. Such amounts are reduced when the Company pays such
liabilities. Such reduction generally occurs over five to ten business days. At
May 31, 2001, the Company had amounts on deposit for these liabilities of
approximately $1,300,000.
Concentration of Credit Risk
The Company is subject to a concentration of credit risk with respect to
its trade receivables, as disclosed above. The Company performs on-going credit
evaluations of its customers and generally does not require collateral. The
Company maintains allowances to cover potential or anticipated losses for
uncollectible accounts.
The Company has cash balances in banks in excess of the maximum amount
insured by the FDIC as of May 31, 2002.
Statements of Cash Flows
The Company paid income taxes of approximately $19,000 and $23,000 and
interest of approximately $242,000 and $252,000 for the years ended May 31, 2002
and 2001, respectively.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
The Company's short term financial instruments include cash, accounts
receivable, receivable from affiliates and accounts payable. Due to the
short-term nature of these instruments, the fair value of these instruments
approximates their recorded value. The Company has long-term debt instruments
which it believes are stated at their estimated fair value.
Stock Options and Similar Equity Instruments
The Company accounts for stock options and similar equity instruments
(collectively "Options") issued to employees and directors in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," rather than the fair value based method of accounting prescribed by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The exercise price for Options issued to employees and directors
equals or exceeds the fair value of the Company's Common Stock at the date of
grant and, accordingly, no compensation expense is recorded. Equity instruments
issued to acquire goods and services from non-employees are accounted for based
on the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more readily determinable.
Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS
No. 130 establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by owners
and distributions to owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements.
Business Segments
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", which supercedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements regarding
products and services, geographical areas and major customers. SFAS No. 131
defines operating segments as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The Company has determined that its operations are in one segment,
computer services to the health care industry.
New Accounting Pronouncements
In October 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
SFAS No. 144 addresses the accounting model for long-lived assets to be disposed
of by sale and resulting implementation issues. This statement requires that
those long-lived assets be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer be
measured at net realizable value or include amounts for operating losses that
have not yet occurred. It also broadens the reporting of discontinued operations
to include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. SFAS No. 144 is effective
for the Company in fiscal 2003. The Company is evaluating the impact that
implementation of SFAS No. 144 may have on the financial statements of the
Company.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the
use of the purchase method of accounting for business combinations initiated
after June 30, 2001, and eliminates the pooling-of-interests method. SFAS No.
142 requires, among other things, the use of a non-amortization approach for
purchased goodwill and certain intangibles. Under a non-amortization approach,
goodwill and certain intangibles will not be amortized in earnings, but instead
will be reviewed for impairment at least annually. SFAS No. 142 becomes
effective for the Company commencing June 1, 2002. The Company does not expect
the implementation of SFAS No. 142 to have a material impact on its financial
statements, since the Company does not have any goodwill or intangibles subject
to SFAS No. 142 at the date of implementation.
On April 30, 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 eliminates the requirement that gains and losses from
the extinguishment of debt be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect and eliminates an
inconsistency between the accounting for sale-leaseback transactions and certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. Generally, SFAS No. 145 is effective for
transactions occurring after May 15, 2002. The adoption of this standard is
expected to have no impact to the Company.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"), provides guidance on the recognition and measurement
of liabilities for cost associated with exit or disposal activities. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company is currently reviewing SFAS
146 to determine the impact upon adoption.
NOTE 2 - Fixed Assets
Fixed assets consist of the following:
May 31,
Useful Life 2002 2001
----------- ---- ----
Computer equipment 5 years $ 3,169,445 $ 2,883,819
Software costs Up to 5 years 12,364,224 10,047,618
Furniture, fixtures and automobiles 4-7 years 419,274 415,330
Leasehold improvements 10 years 2,823,154 2,809,278
------------ -------------
18,776,097 16,156,045
Less: accumulated depreciation and
amortization (11,955,501) (10,119,842)
------------ ------------
Total Fixed Assets, net $ 6,820,596 $ 6,036,203
============ ============
Depreciation and amortization expense relating to fixed assets (other than
software costs) amounted to approximately $443,000 in 2002 and 2001,
respectively.
Unamortized software costs amounted to approximately $5,105,000 and
$4,186,000 at May 31, 2002 and 2001, respectively. Amortization expense for
these costs totaled approximately $1,397,000 and $2,305,000 in 2002 and 2001,
respectively.
During the fourth quarter of the year ended May 31, 2001, the Company shut
down certain operating systems and hardware configurations, which had been
capitalized in previous years. The Company had determined that the older systems
architecture had become obsolete and too costly to maintain, so the Company
coordinated placing several new systems in production after running parallel
with pre-existing systems resulting in the retirement of the older systems
during the fourth quarter. The Company further determined that there is no net
realizable value remaining since no future revenue would be recognized in the
retired systems because the architecture was completely replaced by the new
systems. As such the Company recognized an impairment loss of approximately
$3,300,000 for the year ended May 31, 2001.
NOTE 3 - Debt
Credit Agreement
The Company's wholly owned subsidiary, Sandsport Data Services, Inc.
("Sandsport"), has a revolving credit agreement (the "Credit Agreement") with a
Bank which allows Sandsport to borrow amounts up to $4,500,000 and is due on
June 14, 2003. Interest accrues on amounts outstanding under the Credit
Agreement at a rate equal to the London Interbank Offered Rate plus 2% and will
be paid quarterly in arrears or, at Sandsport's option, interest may accrue at
the Bank's prime rate. The Credit Agreement requires Sandsport to pay a fee
equal to 1/4% per annum on the unused average daily balance of amounts under the
Credit Agreement. In addition, there are other fees and charges imposed based
upon Sandsport's failure to maintain certain minimum balances. The indebtedness
under the Credit Agreement is guaranteed by the Company and Sandsport's sister
subsidiaries (the "Group"). All of the Group's assets are pledged to the Bank as
collateral for the amounts due under the Credit Agreement, which pledge is
secured by a first lien on all equipment owned by members of the Group, as well
as a collateral assignment of $2,000,000 of life insurance payable on the life
of the Company's Chairman. In addition, the Company is restricted in its ability
to declare and pay dividends pursuant to the Credit Agreement. The Group's
guaranty to the Bank was subsequently modified to include all indebtedness
incurred by the Company under the amended Credit Agreement dated August 24, 2001
(see below).
On August 24, 2001, Sandsport, the Company and the other members of the
Group, and the Bank, entered into the Third Amendment and Waiver (the "Third
Amendment") to the Credit Agreement. Pursuant to the Third Amendment,
Sandsport's covenants to the Bank to maintain a certain net worth, and to
maintain certain financial ratios, were revised on a going-forward basis and the
noncompliance with the existing covenants was waived by the Bank. In addition,
in connection with the Third Amendment, Sandsport and each member of the Group
executed and delivered to the Bank a Collective Amended and Restated Security
Agreement, pursuant to which the Bank's security interest was extended to
include a security interest in all of the personal and fixture property of
Sandsport, the Company and the members of the Group. As of May 31, 2002 and
2001, the outstanding balance on the Credit Agreement with the Bank was
$4,500,000 and $3,850,000, respectively.
Long Term Debt
The Company owed National Medical Health Card Systems, Inc. ("Health
Card"), a company affiliated with the Company's Chairman, $500,000 pursuant to a
promissory note, dated May 31, 2000 and due June 1, 2001 plus interest at the
rate of 9-1/2%; interest on such note was payable quarterly. The Note was paid
in May, 2001.
On June 9, 2001, the Company issued a promissory note to Health Card in the
principal amount of $500,000, with interest at the rate of 7%, which was due on
June 8, 2002. This Note was paid in full on August 15, 2001.
NOTE 4 - Income Taxes
The income tax expense (benefit) is comprised of the following:
Year Ended May 31,
2002 2001
---- ----
Current
Federal $ -- $ --
State 17,998 19,000
-------- -------------
Total current 17,998 19,000
-------- -------------
Deferred
192,761 (1,089,293)
Federal
State 38,308 (223,108)
--------- ------------
Total deferred 231,069 (1,312,401)
-------- -----------
Income tax expense (benefit) $249,067 $(1,293,401)
======== ===========
The Company's effective income tax rate differs from the statutory U.S.
Federal income tax rate as a result of the following:
Year Ended May 31,
2002 2001
---- ----
Statutory U.S. federal tax rate 34.0% (34.0%)
State taxes 4.6 (5.8)
Permanent Differences 12.2 1.2
Other 12.9 1.6
---- ------
63.7% (37.0%)
===== ======
The components of deferred tax assets and liabilities consists of the
following:
May 31,
2002 2001
---- ----
Deferred Tax Assets-Current portion
Allowance for Doubtful Accounts $ 81,686 $142,230
Deferred Income 61,367 43,340
Accrued Expenses 56,117 79,706
Other 8,425 9,194
---------- ----------
Deferred Tax Assets, current $207,595 $274,470
======== ========
May 31,
2002 2001
---- ----
Deferred Tax Assets-Long term portion
Net Operating Loss Carryforwards $ 1,642,275 $ 1,255,038
Deferred Income -- 129,255
Goodwill -- 82,872
Other 604 615
--------------- ---------------
Deferred Tax Assets, Long-term 1,642,879 1,467,780
----------- -----------
Deferred Tax Liabilities-Long-term portion
Depreciation and amortization (1,460,054) (1,132,007)
Deferred income (11,246) --
------------- -----------------
Deferred Tax Liabilities, Long-term (1,471,300) (1,132,007)
----------- -----------
Deferred Tax Assets - Long-term, Net 171,579 335,773
------------ -----------
Total Deferred Tax Asset, Net $ 379,174 $ 610,243
============ ===========
Management determined that it was more likely than not that future taxable
income would be sufficient to enable the Company to realize all of its deferred
tax assets. Accordingly, no valuation allowance has been recorded at May 31,
2002 and 2001.
At May 31, 2002, the Company had net operating loss carryforwards for tax
purposes of approximately $4,076,000, expiring at various dates through 2022.
NOTE 5- Commitments and Contingencies
Lease Agreements
The Company leases office space at 26 Harbor Park Drive, Port Washington,
NY 11050 (the "Facility") from BFS Realty LLC, successor to BFS Sibling Realty
and an affiliate of the Company's Chairman (the "Affiliate") (see Note 6). The
Company paid rent in the amount of $407,834 and $615,412 to the Affiliate for
the years ended May 31, 2002 and 2001, respectively.
On June 1, 2001 (revised November, 2001) , the Company entered into a ten
(10) year lease for the Facility with the Affiliate. The lease provides for
annual rental payments of $277,817 for the period June 1, 2002 to May 31, 2003,
with annual 5% increases in each 12-month period thereafter. The lease is being
expensed on a straight-line basis over the lease term. The lease also requires
monthly payments of various types, such as the Company's proportionate share of
real estate taxes and common area maintenance charges, that aggregate
approximately $10,000 per month. In November, 2001, the lease was revised to
provide that the Company would pay its utility expenses directly to the
respective utility company, not to the Affiliate.
The Company has obligations to pay rental expense in connection with six
sale/leaseback transactions. The rental expenses amounted to approximately
$1,195,000 and $1,630,000 for the years ended May 31, 2002 and 2001
respectively. (See Note 8)
Total office space and equipment rental expense under all operating leases
amounted to approximately $2,294,000 and $3,417,000 in fiscal 2002 and 2001,
respectively.
Future minimum lease payments for all non cancelable operating leases at
May 31, 2002 are as follows:
Year Ending May 31, Amount
------------------- ------
2003 $1,759,640
2004 969,461
2005 644,554
2006 336,390
2007 330,988
Thereafter 1,739,257
----------
Total $5,780,290
Litigation
a. On October 19, 1999, the Company and Pro-Health brought an action
against Provider Solutions Corporation ("Provider") and others, in Supreme
Court, New York County, based on breach of contract, fraudulent
misrepresentation and other causes of action, demanding damages of
approximately $10,000,000 (the "State Action"). On October 22, 1999,
Provider brought a federal action in the United States District Court for
the Eastern District of New York (the "Federal Action"). The complaint
demanded relief in the form of a permanent injunction and damages against
the Company and Pro-Health for total amounts ranging from $10,000,000 to
$15,000,000. The State Action was consolidated with the Federal Action.
On March 8, 2001 the Company, Pro-Health, Provider and all involved
parties and individuals settled the consolidated Federal Action, globally
resolving all issues, claims and disputes. The settlement entailed the
exchange of general releases between the Company, Pro-Health, Provider and
all parties, and the payment of $600,000 to Provider, of which $50,000 was
paid by the Company. The balance of the payment under the settlement was
funded by the Company's insurers. The settlement did not have a material
effect on the Company's operations. The Company has retained its
proprietary interest in the subject software.
b. In August of 1999, the Company's wholly-owned subsidiary, Sandsport
was named as a defendant in Greater Bright Light Home Care Services, Inc.
et al. v. Joseph Jeffries-El, El Equity Corporation, Sandsport Data
Services, Inc. et al. (Supreme Court of the State of New York, Kings
County). Sandsport's contractual obligation to Greater Bright Light
involved the depositing of certain government-issued checks into a specific
bank account. Upon receiving written notification from the agency issuing
the checks to stop depositing them in that account, Sandsport ceased
depositing them. The plaintiff brought the action against Joseph
Jeffries-El and El Equity, and El Equity counterclaimed against the
plaintiff, each basing its claims on the financing agreement between them.
El Equity also cross-claimed against Sandsport, asserting that Sandsport
converted the government-issued checks to its own use. Although Sandsport
is named as a defendant, the Complaint seeks no affirmative relief against
Sandsport. Co-defendant Citibank has asserted indemnification claims
against Sandsport and all of the other defendants. Sandsport disputes all
liability. However, the Company is unable to predict the outcome of these
claims and accordingly, no adjustments have been made in the consolidated
financial statements in response to these claims.
c. On March 1, 2000, Dataline, Inc. ("Dataline") began a lawsuit
against MCI WorldCom Network Services, Inc. ("MCI") and the Company for
alleged trade libel and related counts, in the United States District Court
for the Southern District of New York. The court dismissed that lawsuit,
with prejudice, on May 23, 2002. On May 4, 2001 MCI had brought a patent
infringement lawsuit against Dataline, alleging that it was infringing
three MCI patents, under which the Company has an exclusive license in New
York City. Shortly thereafter, the Company joined MCI in the suit against
Dataline. Pursuant to a Settlement Agreement dated January 1, 2002 among
MCI, its parent (MCI Communications Corporation), the Company, and
Dataline, Dataline acknowledged the validity and enforceability of the 3
MCI-owned patents that were the subject of the lawsuits. There were no
payments from either MCI or the Company to Dataline. As part of the
settlement, Dataline agreed to pay the Company $100,000 in cash and issue
an 8% promissory note in the amount of $721,000. Due to the uncertainty of
realization of the note receivable, the Company is recognizing the income
on the note using the installment method of accounting. During the year
ended May 31, 2002, the Company has recognized approximately $115,000 of
income. In addition, Sandata and Dataline entered into an Exclusive Service
Agreement by which Dataline agreed to use the Company's "call capture
infrastructure" for all of Dataline's time and attendance systems, and to
pay royalties to the Company for such use. The terms of the settlement also
included mutual releases.
d. An action was commenced against the Company and Health Card by a
former executive of Health Card, Mary Casale, who alleged that employees of
both Health Card and the Company engaged in sex discrimination as to Ms.
Casale, and thus, violated Title VII of the Civil Rights Act of 1964. In
February 2002 the matter was withdrawn from the Equal Employment
Opportunity Commission, and was settled without any effect on the financial
statements of the Company.
Royalty Agreement
The Company has been granted a license under certain of MCI's patents
which permits the Company to continue to market and sell its SANTRAX time
and attendance verification product non-exclusively nationwide, and
exclusively in the home health care industries for the five New York
boroughs, and that the Company will pay MCI certain royalties, on a per
call basis. The license remains in effect until the last to expire of
various patents held by MCI or until October 19, 2010, whichever is later.
Employment and Deferred Compensation Agreements
On February 1, 1997 the Company and its Chairman ("Mr. Brodsky")
entered into an employment agreement for a five year term (the "Brodsky
Employment Agreement"). Among other things, the Brodsky Employment
Agreement provides compensation at the annual rate of $500,000 or a lesser
amount if mutually agreed. The Brodsky Employment Agreement also provides
for payment of an annual bonus at the sole discretion of the Board of
Directors. Mr. Brodsky agreed to accept a reduction in compensation for the
fiscal years ended May 31, 2002, 2001, and 2000 and has signed waivers
evidencing his agreement to such reductions. The Brodsky Employment
Agreement was renewed, on identical terms, on March 1, 2002.
In May 1992, Mr. Brodsky and the Company entered into a deferred
compensation agreement pursuant to which the Company would (i) pay to Mr.
Brodsky a lump sum ranging from $75,000 to $255,000 if he voluntarily
terminated his employment with the Company after attaining 55 years of age,
or (ii) pay to Mr. Brodsky's beneficiary a lump sum ranging from $200,000
to $450,000 in the event of Mr. Brodsky's death during the term of his
employment with the Company. This agreement was terminated in October,
2001.
On August 9, 2001 the Company announced that it had terminated the
employment of Stephen Davies as President of the Company, and would be
terminating approximately 30 other employees. Mr. Davies received a
severance payment equal to six (6) months' base salary, or $100,000, and
had 90 days from the date of termination to exercise the 66,673 options
that were vested on that date. None of such options were exercised. In
addition, the Company paid approximately $47,000 in severance payments for
approximately 30 other terminated employees.
NOTE 6 - Related Party Transactions
a. In November 1996 the Company entered into an agreement with the
Affiliate, the Nassau County Industrial Development Agency ("NCIDA"), and a
Bank (the "Bondholder") (the "Agreement"). Pursuant to the Agreement, the
Affiliate (i) assumed all of the Company's rights and obligations under a
Lease Agreement that was previously between the Company and the NCIDA (the
"Lease"), and (ii) entered into a Sublease Agreement with the Company for
the premises the Company occupies. Pursuant to the Agreement, the Affiliate
also obtained the right to become the owner of the premises upon expiration
of the Lease. Under the terms of the Agreement, the Company is jointly and
separately liable to the NCIDA for all obligations owed by the Affiliate to
the NCIDA under the Lease; however, the Affiliate has indemnified the
Company with respect to certain obligations relative to the Lease and the
Agreement. In addition, the Agreement provides that the Company is bound by
all the terms and conditions of the Lease, and that a security interest is
granted to the Affiliate in all of the Company's fixtures constituting part
of the premises.
The foregoing transactions and agreements were the last in a series of
transactions involving the Company, the Affiliate, NCIDA, the Bondholder
and the U.S. Small Business Administration ("SBA"). Chief among these was
the borrowing by the Affiliate in June of 1994 of $3,350,000 in the form of
Industrial Development Revenue Bonds (the "Bonds") to finance the
acquisition of the Facility. Simultaneously with the issuance of the Bonds:
(1) NCIDA obtained title to the Facility and leased it to the Affiliate,
(2) the Affiliate subleased the Facility to the Company, (3) the Bondholder
bought the Bonds, (4) the Bondholder received a security interest in the
Facility to secure the payment of the Bonds. The Affiliate's obligations
under the Lease were guaranteed by Mr. Brodsky, the Company, Sandsport and
others. The Affiliate's obligations respecting repayment of the Bonds were
also guaranteed by Mr. Brodsky, the Company, Sandsport and others.
The Bonds currently bear interest at the rate of 9%, and the
outstanding balance due on the Bonds as of May 31, 2002 was $1,444,445. The
Company paid rent to the Affiliate of $407,834 and $615,412 for the years
ended May 31, 2002 and 2001.
On August 11, 1995, the Company entered into a $750,000 loan agreement
with the Long Island Development Corporation ("LIDC"), under a guarantee by
the SBA (the "SBA Loan"). The SBA Loan was assigned to the Affiliate in
November 1996; however, repayment of the SBA loan is guaranteed by the
Company and various subsidiaries of the Company. The entire proceeds were
used to repay a portion of the Bonds. The SBA Loan is payable in 240
monthly installments of $6,255, which includes principal and interest at a
rate of 7.015%. The balance of the SBA loan as of May 31, 2002 was
$599,024.
b. Until January 2002, the Company derived revenue from Health Card, a
company affiliated with the Company's Chairman, principally for data base
and operating system support, hardware leasing, maintenance and related
administrative services. The revenues generated from Health Card amounted
to approximately $693,000 and $2,458,000 for the years ended May 31, 2002
and 2001, respectively. The Company billed Health Card approximately
$126,000 and $821,000 for quality assurance testing of software programs
developed by Health Card and network support, and $47,000 and $561,000 for
help desk services, $175,000 and $448,000 for data processing center as
well as $305,000 and $534,000 for certain computer equipment leases and
other services for $40,000 and $95,000 for years ended May 31, 2002 and
2001, respectively. In addition the Company resells its telephone services
to Health Card. The billings for such telephone services amounted to
approximately $124,000 and $134,000 for the years ended May 31, 2002 and
May 31, 2001 and are recorded as a reduction of operating expense. The
Company was owed $19,280 from Health Card at May 31, 2002. Subsequent to
May 31, 2002, the Company received approximately $14,000 from Health Card,
representing substantially complete payment of amounts due as of that date.
As of January, 2002, the Company ceased rendering services to Health Card.
Health Card continues to pay its allocable share of expenses for shared
services, which amounts to approximately $45,000 per month.
c. The Company makes lease and rent payments to affiliates of the
Company's Chairman. The payments for leased equipment were made to P.W.
Capital Corp. and P.W. Medical Management, Inc., and were $268,011 and
$395,989 for the years ended May 31, 2002 and 2001, respectively. The
payments for the Facility were made to BFS Realty, LLC, and were $407,834
and $615,412 for the years ended May 31, 2002 and 2001, respectively. In
June 2001, the Company entered into a new lease for the Facility which was
revised in November, 2001. (See Note 5).
d. Medical Arts Office Services, Inc. ("MAOS"), of which the Company's
Chairman is the sole shareholder, provided the Company with accounting,
bookkeeping and legal services. For the years ended May 31, 2002 and 2001
the total payments made by the Company to MAOS were $340,869 and $279,894,
respectively.
e. During the years ended May 31, 2002 and 2001 the Company paid an
aggregate of $57,285 and $65,894, respectively on behalf of certain
officers to companies affiliated with the Company's Chairman for payment of
automobile leases.
NOTE 7 - SHAREHOLDERS' EQUITY
Stock Options
The Company maintains the following stock option plans:
1984 Stock Option Plan
There had been 2,536 options granted at an exercise price of $1.88 under an
incentive stock option plan adopted in October 1984 (the "1984 Plan") and
subsequently amended. Options granted under this plan were granted at exercise
prices not less than fair market value on the date of grant. All of the options
outstanding under this plan expired in January 2001. No additional options may
be granted under this plan.
1995 Stock Option Plan
At May 31, 2002, there were 590,500 incentive options outstanding under a
stock option plan adopted in January 1995 (the "1995 Plan"), which provides for
both incentive and nonqualified stock options and reserves 1,000,000 shares of
common stock for grant under the plan. Of these options, 520,500 are held by
officers of the Company. The plan requires that incentive options be granted at
exercise prices not less than the fair market value at the date of grant, and
terminates in January 2005. All options outstanding under this plan are
exercisable at May 31, 2002 at prices ranging from $1.41 to $2.61 per share over
a period of five years from date of grant.
On July 14, 1997, the Company filed a Registration Statement on Form S-8
relative to reofferings of shares of Common Stock of the Company which may be
acquired pursuant to the 1984 and 1995 Plan.
1998 Stock Option Plan
At May 31, 2002 there were 775,579 incentive stock options outstanding
under a stock option plan adopted in October 1998, (the "1998 Plan") which
provides for both incentive and nonqualified stock options and reserves
1,000,000 shares of common stock for grant under the plan. The plan requires
that incentive options be granted at exercise prices not less than the fair
market value at the date of grant and terminates in August 2008. Of the options
outstanding at May 31, 2002, 567,060 were exercisable at prices ranging from
$1.31 to $3.00 over three to five years from the date of grant.
2000 Stock Option Plan
At May 31, 2002, there were 28,340 incentive options outstanding under a
stock option plan adopted on November 20, 2000 (the "2000 Plan"), which provides
for both incentive and nonqualified stock options and reserves 1,500,000 shares
of common stock for grant under the plan. The 2000 Plan terminates in September
2010. Options outstanding under the plan vest over a seven-year period
commencing December 31, 2000 and ending December 31, 2007 and are exercisable at
prices ranging from $1.00 per share to $3.00 per share over a period of ten
years from the date of grant. At May 31, 2002, there were no options currently
exercisable.
Summary information with respect to the stock option plans follows:
Range of Outstanding Outstanding
exercise options options
prices ($) granted exercisable
---------- -------- -----------
Balance, June 1, 2000 1.31 - 3.00 1,523,902 849,871
Granted 3.00 279,808 269,653
Cancelled (76,118) (11,146)
------------ ------------
Balance, May 31, 2001 1.31 - 3.00 1,727,592 1,108,378
Granted 1.00 - 3.00 40,085 150,895
Cancelled (373,258) (101,713)
----------- -----------
Balance, May 31, 2002 1.31 - 3.00 1,394,419 1,157,560
========= =========
Stock option grants to certain officers and directors were as follows:
In October 1998, the Company granted certain directors of the Company
non-qualified stock options to purchase an aggregate of 20,000 shares of the
Company's common stock under the 1998 Plan at an exercise price of $1.00. These
options vested immediately and are exercisable over a five-year period.
In December 1998, the Company granted 520,500 incentive options to certain
officers of the Company under the 1995 Plan at an exercise price of $1.41 per
share. These options vested immediately and are exercisable over a five-year
period.
In February 2000, the Company granted its Chairman incentive stock options
to purchase an aggregate of 350,000 shares under the 1998 Plan at an exercise
price of $1.31. These options vest and are exercisable over a five-year period.
In April 2000, the Company granted certain directors of the Company
non-qualified stock options to purchase an aggregate of 72,000 shares under the
1998 Plan at an exercise price of $3.00. These options vest and are exercisable
over a six-year period.
In April 2000, the Company granted its then President incentive stock
options to purchase an aggregate of 100,000 shares under the 1998 Plan at an
exercise price of $3.00. In October 2000, the Company granted its then President
incentive stock options to purchase 150,000 shares under the 2000 Plan, at an
exercise price of $3.00 per share. The President's employment was terminated on
August 6, 2001, at which date the President became entitled to exercise, for
ninety days, the options that had already vested. Those options consisted of
33,340 shares under the 1998 Plan, and 33,333 under the 2000 Plan, none of which
were exercised before the right to exercise expired.
In November 2000, the Company granted certain directors of the Company
non-qualified stock options to purchase an aggregate of 20,000 shares of the
Company's common stock under the 1998 Plan at an exercise price of $3.00. These
options vest over a three-year period and are exercisable over a five-year
period.
During the fiscal year ended May 31, 2002 non-qualified options to purchase
up to 10,000 shares of Common Stock, at an exercise price of $1.00 per share,
were issued to each of two Directors.
On July 14, 1998, the Chairman, certain officers and directors, and a
former director (who is also the spouse of an officer and an employee of
Sandsport Data Services, Inc. ("Sandsport"), the Company's wholly owned
subsidiary), exercised their respective options and warrants to purchase an
aggregate of 921,334 shares of Common Stock. The exercise prices ranged from
$1.38 to $2.61 per share for an aggregate cost of $1,608,861. Payment for such
shares was made to the Company in the amount of $921 representing the par value
of the shares, and a portion in the form of non-recourse promissory notes due in
July 2001, with interest at eight and one-half percent (8-1/2%) per annum,
payable annually, and secured by the number of shares exercised. The Company has
received interest payments on such notes in the amount of $131,994 and $162,110
during the fiscal years ended May 31, 2002 and 2001. As of May 31, 2002 and
2001, the outstanding balance on such notes, including principal and accrued but
unpaid interest, was $1,669,640 and $1,722,547, respectively (see Note 12d). On
July 14, 2001, the Company agreed to extend the due dates of the promissory
notes for one hundred twenty days. On November 9, 2001, the due date of the
notes was extended to November 9, 2004, and the Company agreed to substitute
full recourse unsecured notes for the notes it had previously accepted.
Effective December 1, 2001, the interest rate was changed from 8-1/2% to 6%.
During the year ended May 31, 2002, 24,667 shares of common stock were
surrendered by a former director and an employee in settlement of notes in the
amount of $37,962. Certain of the above options and warrants were accounted for
utilizing variable accounting, with no material impact on the Company's
financial statements for either of the years ended May 31, 2002, 2001 or 2000.
In accordance with EITF 95-16, "Accounting for Stock Compensation Arrangements
with Employer Loan Features under APB Opinion No. 25", upon substitution of the
full recourse notes for the non recourse notes, the terms of the options and
warrants became fixed and variable accounting was no longer required.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock option plans under the fair value method of
SFAS No. 123. The fair value for these options was estimated at the date of
grant using a Black-Scholes option-pricing model with the following
weighted-average assumptions for 2002 and 2001.
ASSUMPTIONS
Year Ended May 31,
2002 2001
---- ----
Risk free rate 4.95 - 6.05% 5.25 - 6.04%
Dividend yield .00% .00%
Volatility factor of the expected market
price of the Company's common stock 61% 117%
Average life 5 years 5 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly differently from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair market value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options. The
Company's pro forma loss is as follows:
Year Ended May 31,
2002 2001
---- ----
Pro forma net income (loss) $78,025 $(2,470,616)
Pro forma net income (loss) per share $ .03 $ (.99)
The weighted average fair value of options granted during the years ended
May 31, 2002 and 2001 were $1.12 and $.86, respectively. The weighted average
remaining contractual life of options exercisable at May 31, 2002 is 5 years.
The exercisable prices range from $1.31 to $3.00 for options outstanding as of
May 31, 2002.
Restricted Stock Grant Plan
On September 1, 2000 the Board of Directors approved the adoption of the
Company's 2000 Restricted Stock Grant Plan (the "Stock Grant Plan"). The Stock
Grant Plan was subsequently adopted by the Shareholders at the Company's Annual
Meeting on November 20, 2000. The Stock Grant Plan provides for the issuance of
shares that are subject to both standard restrictions on the sale or transfer of
such shares (e.g., the standard seven year vesting schedule set forth in the
Stock Grant Plan) and/or restrictions that the Board may impose, such as
restrictions relating to length of service, corporate performance, or other
restrictions. As of May 31, 2002, no grants had been made under the Stock Grant
Plan and, therefore, no shares had vested under it. There are 700,000 shares of
Common Stock reserved for issuance in connection with grants made under the
Stock Grant Plan.
NOTE 8 - Sale/Leaseback Transactions
The Company is a party to various sale/leaseback transactions involving
certain fixed assets, principally computer hardware, software and equipment.
Gains on these transactions have been deferred and are being recognized over the
lives of the related leases, each of which is 36 months. Approximately $297,000
and $344,000 of the deferred gains were recognized in other income for the years
ended May 31, 2002 and 2001, respectively. Included in these amounts are the
effects of the following sale/leaseback transactions:
In January 1998, the Company consummated a sale/leaseback of certain fixed
assets which had a net book value of approximately $515,000, were sold for
$700,000. The resulting gain of approximately $185,000 was recorded as deferred
income and is being recognized over the life of the lease. Approximately $36,000
of the deferred gain was recognized for fiscal 2001, which was the last year of
the lease. An unaffiliated third party purchased the residual rights to such
lease.
In January 1999, the Company consummated a sale/leaseback of certain fixed
assets which had a net book value of approximately $830,000, were sold for
$1,100,000. The resulting gain of approximately $270,000 was recorded as
deferred income and is being recognized over the life of the lease.
Approximately $60,000 and $90,000 of deferred gain was recognized for the years
ended May 31, 2002 and 2001, respectively. An unaffiliated third party purchased
the residual rights in such lease.
In May 1999, the Company consummated a sale/leaseback of certain fixed
assets which had a net book value of approximately $896,000, were sold for
$1,100,000. The resulting gain of approximately $204,000 was recorded as
deferred income and is being recognized over the life of the lease.
Approximately $68,000 of deferred gain was recognized for each of the years
ended May 31, 2002 and 2001. An unaffiliated third party purchased the residual
rights in such lease.
In October 1999, the Company consummated a sale/leaseback of certain fixed
assets which had a net book value of approximately $895,000, were sold for
$1,115,000. The resulting gain of approximately $220,000 was recorded as
deferred income and is being recognized over the life of the lease.
Approximately $73,000 of the deferred gain was recognized for each of the years
ended May 31, 2002 and 2001. An unaffiliated third party purchased the residual
rights in such lease.
In January 2000, the Company consummated a sale/leaseback of certain fixed
assets which had a net book value of approximately $442,000, were sold for
$561,000. The resulting gain of approximately $119,000 was recorded as deferred
income and is being recognized over the life of the lease. Approximately $40,000
of deferred gain was recognized for each of the years ended May 31, 2002 and
2001. An unaffiliated third party purchased the residual rights in such lease.
In February 2000, the Company consummated a sale/leaseback of certain fixed
assets which had a net book value of approximately $237,000, were sold for
$277,000. The resulting gain of approximately $40,000 was recorded as deferred
income and is being recognized over the life of the lease. Approximately $14,000
of deferred gain was recognized for each of the years ended May 31, 2002 and
2001. An unaffiliated third party purchased the residual rights in such lease.
In November 2000, the Company consummated a sale/leaseback of certain fixed
assets which had a net book value of approximately $421,500, were sold for
$548,300. The resulting gain of approximately $126,800 was recorded as deferred
income and is being recognized over the life of the lease. Approximately $42,000
and $21,000 of the deferred gain was recognized for the years ended May 31, 2002
and 2001, respectively. An unaffiliated third party purchased the residual
rights in such lease.
NOTE 9 - Asset Acquisition and Impairment
On April 27, 2001, the Company acquired certain assets of North American
Internet Services, Inc. ("NAIS"), a provider of broadband services, Internet
access, and co-location services for approximately $201,000. NAIS had entered
bankruptcy proceedings and, under the auspices of the Bankruptcy Court, the
Company was permitted to "credit bid" approximately $124,000 of expenses
(including salaries) it had incurred on behalf of NAIS as the purchase price for
the assets, and was given 180 days to exploit the assets it had acquired. The
Company incurred approximately $77,000 in additional costs related to the
acquisition of these assets. The tangible assets were determined to have no
significant fair value. Therefore, all the expenditures related to the
acquisition were allocated to goodwill. The Company has the option to abandon
the exploitation of these assets within the 180 day period. If the Company
continues to use the NAIS assets, 10% of the profits (defined as earnings before
interest expense and taxes) generated by such use must be paid to the bankruptcy
estate for the first three years.
At May 31, 2001, the Company performed an evaluation of the recoverability
of the assets acquired from NAIS and concluded that a significant impairment of
these assets had occurred based on actual results during the year ended May 31,
2001 and on estimated future cash flows not being sufficient to recover the
carrying value of the goodwill. As such, the carrying value of goodwill was
written down to its estimated fair value, which was determined based on
discounted estimated cash flows. The Company recognized an impairment loss and
write down of the goodwill of approximately $201,000. Considerable management
judgment is necessary to estimate fair value; accordingly, actual results could
vary significantly from such estimates.
NOTE 10 - Retirement Plan
The Company has a 401(k) savings plan covering all eligible employees in
which the Company matches a portion of the employees' contribution. The amount
of this match was $40,204 and $38,197 in fiscal years 2002 and 2001,
respectively.
NOTE 11 - Revenue by Product Line
The Company operates in one business segment, but derives its revenue from
several product lines. The following table provides the service fee revenues for
the product lines earned for the fiscal years ended May 31, 2002 and 2001:
Year Ended May 31,
2002 2001
---- ----
Computerized information processing $ 5,962,880 $ 5,960,450
Telephone-based data collection 7,690,852 7,561,852
Technology infrastructure and outsourcing 736,932 2,071,266
Information technology 2,765,761 2,170,240
Other 17,497 5,261
-------------- ---------------
Total $17,173,922 $17,769,069
=========== ===========
NOTE 12 - Subsequent Events
a. By letter dated June 26, 2002, a former employee of the Company
asserted claims for back wages of $410,000. The letter, from the employee's
attorney, also contained allegations of age discrimination and retaliatory
discharge. The letter also contained an offer of settlement. No formal
litigation has been started and the Company intends to pursue settlement
negotiations. A provision of $200,000 is included in accrued expenses
relating to the asserted claim, which represents the Company's best
estimate of costs to be incurred. The amount of the ultimate cost may vary
from this estimate.
b. The Company has received a proposal to engage in a going private
transaction. The proposed transaction is anticipated to be in the form of a
merger with an entity owned by an investor group to be led by Bert E.
Brodsky, the Company's Chief Executive Officer, and to include Directors
Hugh Freund and Gary Stoller as well as other investors (the "Acquiring
Group"). Pursuant to the proposal, the Company's shareholders (other than
Mr. Brodsky, and the other shareholders that shall comprise the "Acquiring
Group") would receive $1.50 per share of Common Stock of the Company (the
"Shares"), in cash. The proposal may be amended, modified or supplemented
at any time.
The Board of Directors has appointed a Special Committee (the
"Committee"), comprised of Ronald Fish and Martin Bernard, to review the
proposed transaction. The Committee has retained Brean Murray & Co., Inc.
as its financial advisor, and has retained its own legal counsel.
The proposed transaction would result in the acquisition of all of the
outstanding Shares other than the Shares owned by Mr. Brodsky and the other
shareholders that shall comprise the Acquiring Group. The final terms of
any acquisition will be based on negotiations between the Acquiring Group
and the Committee. The proposed acquisition will be subject to, among other
things, (1) the negotiation, execution, and delivery of a definitive
agreement, (2) approval of the proposed transaction by the Committee, the
full Board of Directors and the Company's shareholders, (3) receipt of a
fairness opinion by the Committee, (4) applicable regulatory approval, and
(5) obtaining any necessary third-party consents or waivers. There can be
no assurance that a definitive merger agreement will be executed and
delivered, or that the proposed transaction will be consummated.
c. On July 9, 2002 the Company issued a press release announcing that
Nasdaq had informed the Company that its shares would be subject to
de-listing from the Small Cap Market for failure to comply with Nasdaq's
Marketplace Rules regarding minimum value of publicly held shares and
minimum bid price per share. The Company requested a hearing on these
matters, and the de-listing was stayed until the hearing. The Company was
informed by Nasdaq on August 21, 2002 that the Company had regained
compliance with both Marketplace Rules and that therefore, the hearing was
cancelled and the matter was moot.
d. On August 22, 2002 the Chairman repaid $100,000 of the note
receivable officer.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SANDATA TECHNOLOGIES, INC.
(Registrant)
By /s/ Bert E. Brodsky
Bert E. Brodsky, Chairman
(Principal Executive Officer and
Principal Financial Officer)
Date: March 24, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ Bert E. Brodsky
Bert E. Brodsky, Chairman, Treasurer, Director
Date: March 24, 2003
By /s/ Hugh Freund
Hugh Freund, Executive Vice President, Secretary, Director
Date: March 24, 2003
By /s/ Gary Stoller
Gary Stoller, Executive Vice President, Director
Date: March 24, 2003
By /s/ Martin Bernard
Martin Bernard, Director
Date: March 24, 2003
By /s/ Ronald L. Fish
Ronald L. Fish, Director
Date: March 24, 2003
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Amendment to the Annual Report of Sandata
Technologies, Inc. (the "Company") on Form 10-KSB for the year ended May 31,
2002 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), Bert E. Brodsky, Chief Exectuive Officer and Chief Financial
Officer of the Company, certifies, pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report
fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and (2) The information contained in the Report fairly
presents, in all material respects, the financial condition and result of
operations of the Company.
/s/ Bert E. Brodsky
Bert. E. Brodsky
Chief Executive Officer and Chief Financial Officer
March 24, 2003
CERTIFICATION
I, Bert E. Brodsky, Chief Executive Officer and Chief Financial Officer,
certify that:
1. I have reviewed this amended annual report on Form 10-KSB/A of
Sandata Technologies, Inc. and its Subsidiaries;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the periods covered by
this amended annual report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this amended annual report, fairly
present in all material respects the financial condition, results of
operations and cash flows of Sandata Technologies, Inc. and its
Subsidiaries as of, and for, the periods presented in this amended annual
report.
4. As both Chief Executive Officer and Chief Financial Officer, I am
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant, and I have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to me by others within those entities,
particularly during the periods in which this amended annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
amended annual report (the "Evaluation Date"); and
c) presented in this report my conclusions about the effectiveness of
the disclosure controls and procedures based on my evaluation as of the
Evaluation Date;
5. As both Chief Executive Officer and Chief Financial Officer I have
disclosed, based on my most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data, and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. As both Chief Executive Officer and Chief Financial Officer, I have
indicated in this report whether or not there were significant changes in
internal controls subsequent to the date of my most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Dated: March 24, 2003 /s/Bert E. Brodsky
---------------------------------------
Bert E. Brodsky, Chief Executive
Officer and Chief Financial Officer